14. Some compensation - increase in Lower Earnings Limit, Primary & Secondary Threshold
15. Care required if wishing to minimise NIC but keep tax relief to max on salary; threshold now increased to £7475
16. Primary & Secondary thresholds previously aligned, now £3 per week differential:
17. If pay £7225 salary to keep below £139 Primary threshold (EES contributions) THEN PAY Secondary contributions
18. Very small amount of (£7225 - £7072) x 13.8% = £21.11 Still worth paying £7475 as tax relief is higher than the NIC saving - slight hassle factor to send a cheque!27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 4
43. Under Model Articles , the directors may pay dividends if they believe the company has profits to support them
44. The directors may need to demonstrate that there was sufficient profit at the time the dividend is paid
45. The company must keep a copy of management information, showing the profit &balance sheet; to include corporation tax as this affects the distributable reserves
46. How many contractors do this? Interim dividends become a liability the instant they are paid
48. Payment of a dividend can include the crediting of a director's current account BUT the accounting entries MUST be done at the time the dividend is paid
49. HMRC looking at accounting records & if the entries have been recorded by the accountant when preparing the year end accounts they will argue that these dividends have not been "made available" until that later time - & after the year end
50. This can lead to dividends effectively becoming paid in a later financial year &likely to be in a different tax year - can have dramatic effect on the directors personal tax situation &the company can have problem with overdrawn directors current accounts27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 7
51.
52. Final dividends are only recognised in the company accounts when formally declared by shareholders at general meeting I.e. at the AGM - when signing off the accounts
53. There must be a formal resolution to pay it before the end of the financial year - supported by minutes
54. There can be no backdating! HMRC keen to view this as tantamount to money laundering &hit hard with penalty regime
58. HMRC are suspicious of waivers as most shareholders would not turn down an opportunity to get paid
59. Important to keep proper documentation to support valid reason for a waiver. This might be for example where a major shareholder wants the value of shares to be maintained as an encouragement for other shareholders to invest
60. It is not possible to waive a dividend for an amount greater than the entitlement. If there are reserves of £10,000 and 50/50 ownership the maximum waiver would be £5,000 not £10,000!
61. To be used as last resort &better to get the shareholding right in the first instance
64. Alphabet shares can be used to share the dividend in the desired proportions without the need for waiver. However, it must again be stressed that there should be no restrictions to avoid settlement provisions applying27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 8
65.
66. If the account is overdrawn at any time during the financial year it is reportable note on the accounts.
67. The rules are contained in sec 455 CTA 2010 (formerly sec 419 ICTA 1988)
70. If the loan is still outstanding at the company's financial year end then provision should be made for tax at 25%
71. A corporation tax return return entry will be required to state that the account was overdrawn and that tax is due at 25% of loan
72. If the loan is repaid within 9 months of the year end then there is no need to actually pay the tax over and a note to the accounts made accordingly
73. If the loan is not repaid then the tax is paid with the main corporation tax at the normal due date I.e. 9 months after year end
74. When the loan is repaid or written off this tax is repayable 9 months after the end of the accounting period when repaid
75. If the loan exceeds £5,000 at any time during the year then this will also give rise to a reportable P11d benefit in kind
76. The deemed benefit is normally calculated as the "average loan" outstanding in the tax year and then multiply by "official rate of interest" to give the benefit
77. This then carries with it a charge under Class 1A national insurance at 13.8%, payable by 6thJuly following the tax year
78. The effect on the director: The P11d benefit amount forms part of personal income and must be declared on personal tax return and tax paid accordingly27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 9
79.
80. An overdrawn loan can be achieved with "final" dividend. Note that the dividend would be when proposed, as mentioned previously and therefore this dividend would be dated in the tax year of that date for the shareholders personal tax return
81. In practice some accountants may still treat this dividend as being made at the balance sheet date but this is wrong and could give money laundering issues as mentioned
85. If it is likely that in the following tax year the director may have a much reduced income then it may be preferable to take the loan
86. When personal tax is paid it is gone, whereas 455 tax can be repaid later on
87. If a loan is written off, as compared to a dividend being declared at some later time, then there is potentially national insurance liability thereon
88. However, the emphasis is on the documentation and proper loan agreement with interest rate etc., together with a formal deed of waiver where then there may not be a national insurance liability. This really is more for planning when a reasonable level of salary is already being taken as could be taken otherwise to be a replacement to salary
89. The loan write off route also allows a direct payment to one of the shareholders so could possibly used in preference to a waiver27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 10
92. Business record checks have been started by HMRC and with fine of up to £3,000 it is feared that they will be looking to fines and new penalty regime will breach the loss of tax following recession
100. Evidence of non business deposits - birthday presents and gambling winnings!
101. Claim to subsistence, where located etc. and in particular travel costs - there seem to have been many challenges as to the base of operations so as to potentially disallow as home to work.
102. Payments to subcontractors/freelancers etc. - may be tax status challenge as to why not treated as employee so be careful of a possible tax status challenge on you!
107. Please note that where understatements of income and over claim of expenses this can be construed as being taken by the directors and liability under sec 458 CTA 2010 This works in a very similar what to overdrawn director current accounts and therefore 25% tax together with potential nasty penalties
109. Which brings me to the new penalty regime coming into force from April 2011. New behaviour based penalty regime. Penalties from 0% to 100% depending on category of inaccuracy and co-operation.
112. Mistake despite reasonable care Careless inaccuracy Deliberate not concealed Deliberate and concealed The minimums apply only where company discloses without prompting by HMRC enquiry Prompted rates are MINIMUM of 15, 35 and 50% 27/06/2011 Visit www.crunch.co.uk, the next generation of accountants 11
113.
114. Please note that where understatements of income and over claim of expenses this can be construed as being taken by the directors and liability under sec 458 CTA 2010
115. This works in a very similar way to overdrawn director current accounts and therefore 25% tax together with potential nasty penalties